The above (carried in the first part of this two-part article) appears to paint a rather bleak picture of the future for investors. However, in the continuum of human history such disruptions are actually the norm rather than exceptions. Just see the rapid rebound of economies and markets after the Covid Pandemic, or the rebound from the 2008 global financial crisis. There has been and will be damage to investors assets, especially where leverage is high and fashionable themes are rife, but past the immediate hit patient investors who reposition their portfolios are likely to come out ahead in the medium to longer term. The greatest human trait is adaptability and that is the secret of survival and rejuvenation.
With this thought in mind, let us briefly look at some mega-trends from an investment perspective, besides the above developments. Among other factors, there are three mega-trends that should be kept in view and explored in-depth by investors looking to protect and grow their assets / wealth.
First and foremost, Demographics. To paraphrase Peter Drucker, the management guru, study of demographics will seldom lead a business or investor astray because the die has been cast, people have been born. One needs to follow their life cycle to assess their needs and wants as they age over time – which will provide a reasonable estimate of the long term demand and supply dynamics in the economy. The biggest long term trend in demographics has two major dimensions:
1) the aging of baby-boomers
2) the coming of age (in economic terms) of the millennials.
Over the next two decades, we are going to see the biggest transfer of wealth from one generation to another. This has profound implications for wealth management and socially active investing. The aging of baby boomers will accelerate opening up of opportunities for enterprises serving elders. At the same time, as the ratio of retirees to working population rises, there will be rising burden on private and public pension funds to generate sufficient returns on their investment assets to avoid or at least reduce shortfall in pay-outs to the pensioners. The biggest beneficiary in sectoral terms will be the health sector in all its manifestations, opportunities in ‘senior’ housing communities, the ‘wellness’ industry, among others.
The coming of age of the millennials, who already are moving up the wealth ladder in terms of asset ownership and income generation, will also present challenges and opportunities to the financial services industry. Being tech savvy, their needs and wants from the financial services industry will vary significantly from the baby-boomers. One click convenience is what they are used to and that is what they will demand. They are also much more comfortable in the new work from home environment. What will this mean for wealth management platforms, distributed ledger / block chain usage in transactional banking and trade-finance, for example? Banking as we know it, will be quite different in the year 2032. On the housing front, central office locations would no longer be critical as people may be comfortable in suburban living especially where wireless and Internet infrastructure is reasonably well developed.
The second mega trend is ESG (Environment, Social and Governance) aspects of economic and business activities. Climate change is already upon us and awareness regarding this has increased significantly over the last few years. Surveys by major global banks in the wealth management space are highlighting the fact that up and coming investors (read millennials) are beginning to focus on asset allocations that are environment/climate friendly and help sustainable development. In response, asset manager have started launching ESG investment vehicles.
Along with this, investors are demanding greater transparency about the operations and activities of corporations they invest in and managements are having to take notice of this trend in terms of governance. Gender diversity is yet another area that will be factored into investment decisions by millennials as they come of age. Investment professionals and advisors will have a higher fiduciary duty to know about and manage these expectations. The lead is being provided by some of the world’s largest sovereign wealth funds such as in Norway, which is eschewing investments in fossil fuels or CALPERS, the public pension fund in California that is emphasising allocations in both sustainable investments and ethically run businesses.
Finally, the biggest mega-trend of them all, Information and Communications Technology (ICT). One could spend hours on just this space and still not be able to do justice to its expanse and reach into our lives now and in the future. But it is the reality that is undeniable. Therefore, it will hold investors in good stead to expend significant amount of time and effort to study the evolution of technology going forward and its deep impact on the individual, businesses, government and society as a whole. What are the cutting-edge technologies, what is their growth outlook, how are they impacting and will impact human activities and society. How will we balance the benefits with the risks associated with these technologies? What kind of regulatory frameworks will be required to manage these? And through all this thinking process, one should attempt to discern how investment management will be affected, where do opportunities lie for superior growth, strong ecosystem (platform) control, cash generation – depending on your investment parameters? What may be the pitfalls of following some hype or the other?
Just to provide a taste of the scope of technology sector, consider the following:
Semi-conductors & equipment
Computer hardware & peripherals
Electronic equipment & components
Communications equipment, especially 5G related
Robotics and Drone Technology
Operating System Software and Firmware
Infrastructure Systems Software
Application Software including Enterprise Software
Cloud Computing, Software as a Service (SaaS & IaaS)
Database and Analytics Software
Artificial Intelligence (ML and DL)
NEXT GENERATION TECHNOLOGY
==> Electric Vehicles & Battery Systems
==> Payment & Point-of-Sale Solutions
==> TV Streaming Platforms
==> Virtual Healthcare
==> Real Estate transactions e-platform (Prop Tech)
==> Medical Genetic Testing and Gene Editing
==> 3-D Printing Equipment
==> Online Mortgage & Consumer Lending
==> Block chain driven financial applications
==> Online Education Technology
And last but the least, Internet of Things (IoT) and the 4th Industrial Revolution in Manufacturing.
Let me conclude by reminding readers that at the most fundamental macro level, investors’ starting point for determining investment destination is P.E.S. – Political, Economic and Social stability. This is a joint responsibility of the private sector (businesses and individual citizens), politicians, the government of the day and the permanent bureaucracy. Unity of purpose and action will distinguish nations that are successful in attracting investment and those that increasingly fall behind.
(The writer is a board member of the Pakistan Stock Exchange and vice-president of Canada Pakistan Business Council)
Copyright Business Recorder, 2022